This paper delves into the value premium in equity returns, exploring the superior performance of value stocks with high book-to-market ( \(\text{BM}\) ) ratios over growth stocks. It introduces two novel decomposition models for \(\text{BM}\) , incorporating Ball et al. (J Financ Econ 135:231–254, 2020)’s findings on the significance of the retained earnings-to-market ( \(\text{REM}\) ) component. Through empirical analysis, the paper demonstrates REM’s predictive superiority over traditional \(\text{BM}\) factors in forecasting stock returns, suggesting a shift toward \(\text{REM}\) in asset pricing models. The research contributes to understanding the dynamics of the value premium, offering a refined methodological approach for evaluating firm value and equity returns.
